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RBA to reset mortgage rates to record low – 30 May 2019

Australian Financial Review

Mortgages are already at the cheapest levels on record and will fall even further if the Reserve Bank delivers a widely expected interest rate cut next week, after the Coalition’s election victory reignited interest in the housing market.Forecaster JPMorgan on Wednesday issued the most dovish prediction in the market with respect to the RBA’s policy path: chief economist Sally Auld tipped the central bank would cut four times to 0.5 per cent by the middle of 2020. The 10-year government bond yield tapped a record low 1.48 per cent.Experts expect the major banks to pass on most, if not all, of a one-quarter of a percentage point drop in the official cash rate to 1.25 per cent at Tuesday’s meeting, which financial markets estimate is an 86 per cent chance.

“They should pass it through,” said Jason Kururangi, a portfolio manager at Aberdeen Standard Investments. “I think that their licence to operate has probably come into question in the last few years.”

Commonwealth Bank boss Matt Comyn, in his first major speech on Tuesday, vowed to put “customers first”.

Banks risked negative “optics” should they withhold any of what economists believe will be the first of two rate cuts by Governor Philip Lowe, Mr Kururangi said. “They really need to be quite conscious of their behaviour.”

Lenders have already moved to slash fixed rates in the past two months, according to RateCity’s director of research, Sally Tindall. With 16.2 per cent of the market opting for locked-in rates, the lowest fixed rate is now 3.48 per cent for three years from Loans.com.au.

“Variable is the big ticket item,” Ms Tindall said, referring to standard variable or floating rate mortgages. Mortgage House offers an “RBA special” of 3.29 per cent.

That rate is the lowest ongoing variable offer for a single loan, she said, and eclipses the previous low of 3.35 per cent last seen in 2016.

“It goes without saying that a weak domestic economic backdrop leaves the RBA very vulnerable to global disappointments,” Ms Auld said.

Banks have ‘nowhere to hide’

Last time the cash rate was lowered, in August 2016 under former governor Glenn Stevens, the banks passed on about 12 basis points of the 25-basis point move, Ms Tindall recalled.

Mortgage broker Ben Kingsley agreed there was no excuse for the banks not to match the rate cut in full. “If the banks don’t pass it on, they have got nowhere to hide. They have got no argument at all,” he said.

While bank CEOs are prevented by price signalling laws from speculating about how they would respond to any rate cut, all of the big four CEOs have expressed an opinion on whether the cash rate will fall.

Westpac CEO Brian Hartzer said earlier this month that an official interest rate cut was unlikely to reinvigorate economic growth and will create an additional headwind for banks’ earnings.

But ANZ’s Shayne Elliott declared on May 1: “I think the argument for a small rate cut is sound.”

CBA’s Mr Comyn has acknowledged that the royal commission into the financial services sector and ongoing public scrutiny of banks would be factored into its decision making.

The banks spent almost a year in front of the royal commission.

Morgan Stanley banking analyst Richard Wiles was cooler on the idea of passing through the rate cut in full: the major banks will only be able to pass on 10 to 15 basis points, about half, if they intend to maintain their profit margins, he said. “In a lower rate environment, all else being equal, the margin gets squeezed.”

In New Zealand, where the RBNZ cut rates by a quarter of a percentage point this month, banks have only passed on about 15 basis points to borrowers, governor Adrian Orr said on Wednesday.

Indeed, the banks may not even act as in unison, Aberdeen’s Mr Kururangi said, pointing to the example of National Australia Bank, which last year broke away from its peers by declining to lift mortgage rates to compensate for higher offshore funding costs.

But the banks won’t be able to rely on the argument that funding costs are elevated to stand firm in defiance of rate cuts this time.

Bank of America Merrill Lynch’s chief economist, Tony Morriss, noted that three-year Australian government bond yields – “which are a good proxy for fixed rates” – are at a “really low” 1.12 per cent.

‘Funding conditions are easing’

The three-month bank bill swap rate, an important component for floating rate mortgage pricing, is at 1.43 per cent, having fallen sharply in the last few days, he noted.

“Funding conditions are easing so I think that would make it easier to pass any rate cut on,” he said. “Market conditions would argue for them to pass on most, if not all” of any cut.

Monetary easing would come on the heels of proposals announced last week by the prudential regulator to ease lending restrictions, such that the effect of any rate cut will be magnified, the Bank of America economist said.

“If you are cutting the cost and [helping] the availability of credit, then the impact of policy easing is likely to be greater.”

Banks could also resist lowering interest rates by focusing on depositors rather than borrowers if their objective is to protect margins.

“All options are on the table and it’s clear the movement in bank bill swap rates will play a part in their decision,” the banking analyst Mr Wiles said. Any bank decisions around deposit levels will influence what they do on the lending side, he said.

The founder of online mortgage broking group Loan Dolphin, Ranin Mendis, who sees all the big banks use his platform, said the June meeting would be the first key test of trust for the banks since the royal commission.

“This is the first instance they get since the royal commission to prove that they can be trusted and pass on the cut,” he said, “I think if one bank moves the others will follow.”

Article appeared in The Australian Financial Review on 30 May 2019.

Article written by Sarah Turner and Matthew Cranston.

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